A quick reminder to make sure and read the Washington Post’s Article on the Federal Reserve’s History over the past 15 years and the mortgage market.

It’s great evidence that we had the regulation we needed to force non-bank lenders to comply with the regular banking market, but the regulators, the Federal Reserve in this case, weren’t willing to enforce consumer protection:

The advocates amassed evidence of abusive practices by lenders, such as Fleet Finance, an affiliate of a New England bank that eventually paid the state of Georgia $115 million to settle allegations that it charged thousands of lower-income black families usurious interest rates and punitive fees on home-equity loans. The National Community Reinvestment Coalition pressed the Fed to investigate allegations against other affiliates.

On Jan. 12, 1998, the Fed demurred. Acting on a recommendation from four Fed staffers including representatives of the Philadelphia, St. Louis and Kansas City regional reserve banks, the Fed’s Board of Governors unanimously decided to formalize a long-standing practice, “to not conduct consumer compliance examinations of, nor to investigate consumer complaints regarding, nonbank subsidiaries of bank holding companies.”…

Last week, Inner City Press received from the Fed six hundred pages of documents responding to ICP’s Freedom of Information Act request about the Fed’s fair lending enforcement. The documents reflect that on January 20, 1998, the Fed’s Division of Division of Consumer and Community Affairs circulated to the Governors a memo urging them to vote to “adopt a policy to not conduct consumer compliance examinations of, nor to investigate consumer complaints regarding, nonbank subsidiaries of bank holding companies.”

This proposal to adopt a policy, that would affect the public, was never put out for public comment. Nor, apparently, did the Fed ever discuss it with its Consumer Advisory Council. The internal Fed committee that proposed the policy was composed of Glenn Loney of Board staff, Michael Collins of the Philadelphia Fed, Joan Cronin of the St. Louis Fed and John Yorke of the Kansas City Fed. Before being presented to the Board, it was “run by” Governor Meyer and then Vice-Chair Rivlin. The memo, among other things, states that “over the years an informal policy had developed to encourage Reserve Banks to investigate Congressionally referred complaints involving nonbank subsidiaries of bank holding companies” — but no others.

A quick google search shows all four still have their jobs, and may have been promoted over the past decade. Sweet gig. Note both that the plan that they came up with wasn’t put out for public comment, and especially that this memo was put out by the “Fed’s Division of Division of Consumer and Community Affairs.” I’d like more experienced fed watchers to comment, but it doesn’t even seem like the consumer affairs teams that would have tried to regulate this market were overridden by the model/navel-gazing macroeconomists upstairs – the group itself said it shouldn’t interfere and cut it’s own legs out from under it (perhaps because they knew in advance they’d be overridden upstairs, and didn’t want to rock the boat).

I’m going to spend some time over the next few weeks going through the record from the past decade and see if I can get a sense of what these four, acting as a stand-in for the Federal Reserve’s consumer protection group, were thinking. I’ll tag it Consumer Protection At the Fed.

First Update: Glen Loney and his boss hold a conference on Home Equity in 2000.